Thursday 30 May 2013 12.28 EDT
First published on Thursday 30 May 2013 12.28 EDT

The European commission has been accused of a land grab by the work and pensions secretary, Iain Duncan Smith, after it launched a court case aimed at securing equal rights for non-British EU nationals resident in the UK.

Stepping into the incendiary debate on immigration and benefits fraud, the EU executive said two years of fruitless negotiation with David Cameron's government had left it no option but to take the case to the European court of justice in Luxembourg.

But Duncan Smith vowed: "I will fight this every step of the way, I will not cave in and I will continue to work on strengthening our benefit system in the meantime to ensure it is not open to abuse by anyone."

The issues of EU sovereignty, immigration and welfare involved in the legal dispute bring together the touchstones that have led to a surge in support for Ukip.

They are also likely to become a point of principled dispute in the argument between the Conservatives and the commission over the redrafting of the balance of competences between the commission and individual EU states.

Duncan Smith said he had been given assurances by Cameron that social security would be a red line for the Conservative party in its broader negotiations with the EU over the balance of power between the commission and nation states.

He said Cameron was "very clear that we will do whatever it takes to makes sure that we control our benefits system, because we cannot have British taxpayers living under the cosh of the European commission telling them who they will pay their benefit money to".

The dispute revolves around two different sets of criteria determining entitlement to social security benefits, with the EU applying "habitual residence" rules – also signed up to by the UK in 2009 – but Britain also using a more restrictive "right-to-reside" formula when deciding if non-British EU citizens in the UK are eligible for child benefits, child tax credit, income-based jobseeker's allowance and state pension credit.

The last Labour government introduced the extra right-to-reside test, which the commission claims breaches EU rules on eligibility for welfare.

Duncan Smith said: "The commission is now trying to use freedom of movement as a way in to start controlling what national governments do about those who are not in work in their countries. I think it's a blatant land grab." Speaking on BBC radio, he added: "If we do away with our right-to-reside test, what will happen almost immediately is that people from day one will be eligible to income-related benefits."

The Department for Work and Pensions said: "The right-to-reside part of our habitual residence test is a vital and fair tool to ensure that benefits are only paid to people who are legally allowed to live in Britain. We have always been clear that we believe our rules are in line with EU law. If the commission decides to begin legal proceedings, we will fight vigorously to ensure that our benefit system is protected from abuse by migrants."

Labour supported the government position while Nigel Farage, the Ukip leader, challenged any suggestion that the UK could overturn the EU's powers.

The commission contends that British rules deciding how foreign EU nationals qualify for social security payments are discriminatory, despite Britain's commitment to a common EU system. Jonathan Todd, a commission spokesman said: "The difference between us is fundamental … There's no alternative but to resolve the issue before the court of justice."

The commission said 28,400 applications for benefits from foreign EU citizens had been rejected in Britain between 2009 and 2011 – two out of three applications. It believes many of them would have been granted were it not for the tighter UK rules which Brussels argues are illegal. The commission also cited a London University study which found that EU nationals living in Britain paid in more to the social security system than they took out. Despite the clear political impact from the timing of the court action, commission officials insisted they were acting purely on legal grounds.

Stephen Booth, director of Open Europe, a sceptical thinktank that supports Britain's continued EU membership, said: "The European commission has thrown a hand grenade into an already intense debate about the UK's continued EU membership. At a time when public support for both the EU and immigration are wafer thin, this is the worst possible issue the commission could have sought to challenge, at the worst possible time."

"Free movement of workers has been beneficial to both the UK and Europe but an absolutely key plank in maintaining public confidence in this area is to give national governments discretion to safeguard their welfare systems. If the commission wants to push the UK out of the EU, it's doing a pretty good job."

Open Europe accepted that the additional UK residence test was legally contentious.

Adam Weiss, legal director of the Advice on Individual Rights in Europe centre, who made the original complaint to the commission, said British and Irish citizens always passed the right-to-reside test but other EU citizens did not.

"What EU law says is that in relation to these benefits, discrimination based on nationality is prohibited, so it is not fair, it is not lawful, to discriminate, to favour British and Irish citizens on the one hand and to discriminate against citizens of other EU member states on the other hand," he said.

He added that in many cases EU citizens who had been living, working and paying tax in the UK were denied benefits such as state pension benefit and child tax credits.

Speaking on the BBC's Today programme Peter Lilley, the former Conservative cabinet minister, said: "The European commission is now saying that our jobseeker's allowance is not social assistance, even the non-contributory bit of it. That seems to me flying in the face of their own rules, but in any case is an attempt by them to extend their competence into areas where the treaties say they shouldn't be involved. To extend it to others would be costly, unwelcome, undemocratic, not approved by parliament and I hope we will strongly resist this."

Britain and Brussels have been at loggerheads for weeks over Theresa May's campaign to clamp down on so-called "benefits tourism". Cecilia Malmström, the European commissioner for home affairs, said there was no evidence to support the claims of immigrants arriving in Britain purely to get benefits and that requests for data from Britain had been ignored.

But diplomats and officials in Brussels admit that concerns about benefits shopping across the EU are growing in several countries and London has some influential supporters who are also increasingly keen on Brussels-bashing.